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Lease health check – Clauses which might be useful to the Landlord or Tenant during Lockdown

Keypoints

  • Free Period
  • Rent Deposit
  • Deed withdrawal
  • Rent Reduction
  • Rent Review
  • Rent Clause
  • Negotiating an early surrender
  • Lease Expiring

Speaker

Mr. James Harrison

Director of Commercial Property


020 3962 0148

Transcription

Free period, Rent Deposit, Deed Withdrawal,Rent Reduction, Rent Review, Rent Clause Negotiating, an early surrender or lease expiring.

So the first question, Is can a tenant bring a commercial lease to an end as result of COVID-19?

Well, the answer is no, because unless the lease contains a break right, the tenant has no right to terminate the lease. The Tenant may argue that COVID-19 is a Force Majeure event, which is an event that is outside the control of both the landlord and the tenant, and prevents the tenant from exercising its obligations under the lease.

However, if there was a Force Majeure clause, it would need to be set out in the lease. And most commercial leases, these stage do not contain such a clause. Therefore, you cannot argue that. Whether in the future, when leases are drafted after the outbreak is finished, we'll see more of these Force majeure clauses. That is a possibility, but for most current leases that clause is not usually included. Now a tenant may feel like just simply shutting up shop, handing in the keys and walking away.

This is not to be advised, because until there is a formal surrender of the lease, the tenants liabilities on the lease will continue. So that's the obligations to repair the property, the obligations to pay the rent and service charge and so on.
So the tenant should not simply just walk away because they will still be liable and the landlords can come after them.

Likewise, the landlord should not accept the keys to the property if the tenants simply offers them, because if the landlord accepts that, Its act of accepting the keys could amount to implying that there is a formal surrender of the lease and then the liabilities of the tenant will come to an end. So the landlord has to be very careful about not accepting the keys until he has some formal deeds surrendering the lease.

The next question, Can a tenant withhold the payment of rent as a result of COVID-19? Again, the answer is no.

Most leases will contain a clause it says the tenant has to pay the rent and cannot withhold any sums against it or anything like that. It has to pay the rent full and flat. Further effect of non paying rent is that lots of tenants may have personal concession, such as reduced rents, for example, under tenants, which are documented by way of a side letter and these concessions, are important.

So if the tenant decides not to pay the rent, it will lose its concession and in the future will suddenly be landed with a large bill because by not paying the rent, the concession may have ended as well.

Furthermore, if the tenants say, well, I'm not paying the rent because the landlord can take the rent out of the rent deposit deed. The tenant has to be aware that as soon as the landlord takes the nonpayment of rent out for the rent deposit fee, the tenant is normally required under the rent deposit deed to top up the rent. So by not paying the rent on the lease , it will still be we're required to top up the rent payment the landlord has withdrawn from the rent deposit deed.

Furthermore, If the Tenant decides not to pay the rent, but it's already exercised at Break Clause. he could invalidate that break clause because most break clauses require the rent to be paid up to date at the date of the break. So if the tenant had decided in March not pay the March payment of rent but had previously exercised a break clause to say, to expire on the June quarter date because the rent hadn't been paid, the landlord could say that the break on the quarter date in June is invalid because the rent is not paid up to date.

There have been new measures, as you may have seen in the press.
That's the government has introduced in March where it does not allow the landlord to forfeit the lease for nonpayment of rent until after the 30th of June, 2020. Now this is a temporary measure only, basically tenants will not be forced out of their premises due to nonpayment of the March quarter of rent, but it is only a moratorium. After 30th of June, the rent is still due and the tenant is still liable after that date. Now, will that date change? We don't know, just keep up to date with the news.

Practically speaking, will the landlords actually take action to forfeit the lease for nonpayment of rent? If the landlords did that, they would leave themselves with empty properties, with the unlikely, hood of actually renting them again in the immediate future. So some rent is better than no rent at all.

The other remedies available to the landlord for nonpayment of rent are still available despite not being able to use the termination or forfeiture clause. These include being able to take action against tenant, and instigate insolvency proceedings or calling or any carrying tools under the lease. Or as already mentioned with drawing on the rent deposit deed.

The next question, Can a tenant request a rent suspension if the premises are unusable due to COVID-19 and the government legislation?

At least suspension is not a normal course to find in the lease for nonpayment of rent. Suspension is usually allowed if the premises are damaged, destroyed, or unusable due to an insured risk. Moreover suspension, is it covered on the landlord's policy? Most more than commercial leases only provide for suspension as I've mentioned, if the premises are damaged, destroyed, or unusable, and only if the landlord's insurer offered cover under its policy terms, and this is unusual.

However, As with all things, a check of the landlord's insurance policy, it should be made before looking at any other alternative. Sometimes a lease will allow for suspension for uninsured risks. If the lease does allow for that, the landlord will then needs a look at his loss of rent insurance on his policy. If tenants are concerned, they should be, and probably have been looking at their business interruption insurance.

Rent review. It may be counterintuitive at this time to consider or contemplate reviewing the rent under a commercial lease, particularly where there's any going to be an upward only rent review. However in previous crisis where rental growth was established in itself beforehand, a rent review resulted in an increase in rent wasn't out of the question, the key to all this is the rent review date. And this is the date at which the evaluation is made.

So basically if the rent review date is, say in the February, then of course COVID-19 would not be taken into account in terms of an evaluation. Just for example, in 2008, the lawyers, who were having to deal with rent reviews at the time of the financial crisis, came up with many different valuations, depending on the actual rate review date. So if it was on the 24th of June or the 29th of September, or the 25th of December 2008, Several different valuations came up because they were trying to account for the crisis at the time, most important things say for rent review is to consult a surveyor, but it's also important to ensure that tenant and landlords with reviews this year or next year, keep the information on what they and the market in which they operate know about the disease, any estimations as to its implications and how that features and their decision-making processes at the relevant times, there are of course, ongoing reviews at moment where these sorts of issues are coming to a fault.

So now the crucial question, which I think is what most people are looking at and have been looking at is How do we stop paying rent or change the rent payments because we have no business?

The crucial thing is to talk to the landlord, as mentioned earlier, some rent is better than none at all. Now, landlords and tenants have been talking and should continue to talk. But the potential way of ensuring that the rent is paid is to offer up a different, Example saying the tenant say, well, I'll pay the quarter rent, but I'll only pay it in monthly payments. So it's cash flow issue or I will offer to pay it in six months time and effectively makeup for the six months that I don't pay now at a time when everything is back to normal.

So, Staged Payments make up the balance owed later is probably what most landlords and tenants will come to. Often tenants will say, well, we don't know what the future's going to be. We want a Rent Reduction and we probably want a permanent Rent Reduction. The landlords have to be very careful about accepting a rent suspension or a rent reduction.

They have to ensure that it is carefully and properly documented, so they need to avoid the possibility that they won't - they avoid the waiver of the right to receive the full rent in the future. And they also have to avoid the arguments that by reducing the rent, the lease has been permanently varied, as mentioned before these rent reduction or rent suspensions are intended to be temporary.

Furthermore, a rent reduction may have an implication if a tenant wishes to assign the lease because the tenant would argue that on assignment, the rent is the reduced rent and not the full rent. The Landlords will also want to ensure that if they accept a rent reduction now they have the ability to claim the shortfall in the future.

So the balanced to be paid in the future and when it will be paid? will it be interest on that balance? What is the rate of interest? Furthermore, the landlord and tenant should agree how long these temporary arrangements should last and whether they should be noticed terminating these arrangements.

Furthermore, if the landlords and tenants do not do things properly and document these things properly, Then it potentially will have an effect on future rent review and/or renewing the lease in the future, Turning to Rent Deposit Deed, as mentioned earlier, the landlord has a right to draw down on the rent for nonpayment of rent. The tenant will be required to top up that payment. If the landlord has draw it down. So the tenant, although he doesn't pay the rent under the lease, he's still required to make the payments under the rent deposit deed.

The landlord has to be careful, but by exercising its right to wave to draw it down, he doesn't then waive the right to forfeit the lease after the temporary measures have ended. So, If the landlord and tenants want something more permanent rather than a temporary reduction, then the landlord and tenant will have to consider whether there are any break clauses. As mentioned above a tenant can usually only terminate a lease before the end of the term if there's is a right to break the lease. Break clauses Are useful tool for both landlords and tenants.

Break clauses are an explicit right for the landlord or tenant or both to terminate the least as an agreed point in time, this can be a specific date or dates or can be a Rolling break, which enables the relevant party to break any time during the lease. For a break to be effective, it will need to meet various conditions and this is as far as well to get professional advice in order to ensure that they comply with these as failure to comply with the conditions may result in the break rights not being exercised and being invalidated and the lease continuing. The common conditions are noticed, often break clauses will be drafted so that a tenant or landlord will have to give the other party six months notice before the break date, obviously, the parties required and advice to retain proof that the break notices were sent, and the acknowledgment by the other party. As already mentioned, a break notice to be prepped for a break notice to be valid, payments of all rents, and all the sums at the break dates will need to be up to date. So if the rent is paid quarterly, this may mean paying the rent and other sums due beyond the rent payment date and include any sums of money for rents or other sums that they have not paid previously and are effectively late sums.

Thirdly, most importantly, exercising the break means the tenant will have to give up vacant possession of the lease. This means the tenants who not only have to surrender the lease and the document, but actually physically move out of the property and remove all its possessions, fixtures, and fittings, so that the landlord can actually use the property.

Failure to remove it's possessions will lead to arguments about whether the break is valid or not because the landlord cannot use the property if the property is still full of the tenants, fixtures and fittings, and possessions. Not so normal now, but certainly it's worth checking every lease is to whether the tenants has complied with its repairing obligations.

Quite often, at least will state that it needs to comply with this repairing obligation at the date of the break. This means that it needs to kick off the property in good repair and it ought to check all its obligations under the lease before actually exercising the break. So it's to be sure that that will be nothing that will catch it out at the break date, which would then threaten the validity of the break. Break clauses as mentioned, often require the tenant to pay the rent up to the break date. Now, if the break date is not on a quarter date, the tenant would have paid the rent beyond the quarter dates and likewise may have paid the service charge beyond the quarter date. Some leases will have been , if drafted properly, will require the landlord to refund those rents and service charges that go beyond the quarter date assuming the quarter date is the or beyond the break dates.

Furthermore, one should look at the break to consider whether it is personal to the named tenant on the lease. This is crucial in terms of whether the tenants, you can actually exercise the break. If the tenant has taken the lease or bought the lease from somebody else and the break is specific to the previous tenants. Then that tenant will not be able to exercise the break cause this is personal to the original tenant or the previous tenant.

The most important thing is to talk to the landlord before excising the break to give them notice that this is what you're intending to do so that you are aware of any potential problems in exercising the break. This is because once a break notice has been served, it cannot be withdrawn. If it can't be withdrawn and the landlord and tenant then decide, well, actually things aren't quite so bad, then we can go back to how it was, actually this, this causes a legal problem because the break will potentially have broken the lease. and if they want to go back to position where they were before the outbreak, then that would probably require the drafting of a new lease.

Furthermore, at the break date, the tenant, as well as giving vacant possession will have to yield up the property and this will be in accordance with its repairing obligations. This may mean removing the alterations that it has installed and so on. So one has to read the lease and check everything before exercising the break. Now very briefly, there are two types of lease, One has to consider the Break Clause is in terms of, at least that is excluded from the landlords and tenants security of tenure provisions and one that is, in the lease that is protected, which is inside the security of tenure provisions.

Basically there are two types of lease. If the list is included and has the security of tenure provisions, that means at the end of the contractual term, the contractual term ends, but the statutory term continues. This is very important because effectively the tenant will still remain liable for all its obligations, including the payment of rent once the contractual term ends because it's statutory term has been instigated. For a landlord. If the landlord has a break notice in a protective lease, he would also be required to serve a section 25 notice because its break notice simply brings the contractual term to an endut in order to bring the statutory term to an end, a section 25 notice would be required in section 25 notice to obtain possession from the tenant. It's very difficult to obtain because it has very strict conditions and these include requiring the landlord to prove that he wants the site for redevelopment or for his own use.

So it's quite unusual for a protected lease to have a break notice in because the landlord already has the requirement to serve a section 25 notice to bring the lease to an end. Tenant's break notice in a protective lease, simply operates as a notice to quit. At least that is excluded from the landlord and tenant provisions. Then once the break notice is served, the lease ends on that contractual date. Finally, if there are no break clauses, the tenant can try negotiate a formal surrender with the landlord, which will often require payment of a premium and a formal deed of surrender.

If the landlord doesn't agree to surrender, then the only option is to wait to the expiry of the lease and as mentioned. In the least, as it's excluded from the landlord and tenant tax, then the term expires on the contractual date. If we're talking about, a lease that is protected, then under the 1954 act, a further three-month notice would be required to be served by the tenant on the landlord to bring the statutory term to an end. The only base, the only requirement for the tenant to be able to serve this notice is that he would have been in occupation for one month. And again, like any notice once served, it will be irrevocable. Mr. James Harrison: Thank you very much. And if you have any questions, please do not hesitate to raise them or get in contact.

Mr. Vinay Tanna: So Thank you very much James. We now just open the floor. If there's any questions. There are a few questions. My lease expired 18 months ago in terms of broken down over a new lease. So presumably negotiations, can I simply walk away? Thank you. I'm just going to bring in at this point another Panelist, which is Daniel Flynn. Daniel is a litigation partner at the firm, and, he is here also to answer any questions that you have. so I'm just going to invite Daniel to come in.

Mr. Daniel Flynn: Hi!

Mr. Vinay Tanna: Hello there! So just bear with me a second. Welcome Daniel! So the question is that my lease expired 18 months ago and the terms have been broken down over a new lease. I think he means the negotiations. Can I simply walk away from the expired lease?

Mr. Vinay Tanna: James, did you want to comment on that?

Mr. James Harrison: Yes. So the question is my lease expired 18 months ago in terms of broken down over a new lease, can the tenant just, I'm assuming this is the tenant, just walking away. This does depend on whether the lease is a protected lease or non-protected lease. If it's a non-protected lease and the contractual term expired 18 months ago provided the tenants has removed its possessions and so on and left the property, been vacant possession. then the tenant is likely to be able to walk away unless of course a tenant has paid the rent on the basis that it used to pay the rent, in which case it may be required to give notice. So if the tenants have paid a, quarterly payment after the contractual term have expired, just to continue occupying the property, then effectively a form of tenancy will, may have been created and the tenant may be required if he's paid three months rent to then give three months notice to terminate the effectively the unwritten tendency will.

Mr. Vinay Tanna: Did you want to add anything in terms of, the walkaway and what could happen in terms of any potential litigation?

Mr. Daniel Flynn: Just way someone has walked away and a landlord is thinking about enforcing the obligations under the tenancy, as James says that there might be a tenancy will created. And there might be a kind of, an expectation that rent will be due and that will be notice due from the tenant. The landlord might have some difficulty in enforcing that because the court will say you could have just let the property out again. And that would have been how you would have got that money back is just by putting the property back on the market and getting a new tenant in and so you will be limited, I think, to recovering from that sort of tenant money rent for, even if there was a notice period implied for a reasonable period for relaxing the property.

Mr. Vinay Tanna: Right. So we're going into the next question. thank you. Which is, I mean, one question obviously, and I think it's a really relevant question, is it, Can I let someone who wants to use my coffee, and who will effectively pay me the rent? So, you know, it's, it's a very neat way of getting out your obligations. James, is there is a way of, you can just simply walk away from this need solution.

Mr. James Harrison: Well, again, the question was you will need to check the terms at least because effectively what you are dealing with is you're dealing with the alienation clause in the lease because alienation clause will confirm who can use the least other than the named tenant. And if you're allowing somebody else into the property, you are effectively assigning that, lease to someone. the other issue is that if you're sharing the rent, if you're allowing somebody else in, the, the issue for the landlord is that landlord doesn't have a contractual relationship with that tenant and would not probably allow it unless there was some formal assignment to the person who is sharing it, even if it's an assignment from the existing tenant to the existing tenants and the sharer. Mr. Vinay Tanna: Daniel, did you want to talk about that? Cause it's literally walking away from your responsibilities, but then having this additional party who's effectively, in your shoes effectively. Mr. Daniel Flynn: I mean where there's an obligation to pay rent as a tenant to a landlord, you've got to formally end that obligation. And the risk is that you say, "Oh, I, you know, I hand it over to my sub tenant and I, they've taken over the lease from me." The landlord will say, "Well, I don't have any contractual relationship with that, my relationship is with you." So even though you walks away from this, you're still. Well, I'm still not able to get possession of the property back. You will still be liable for defaults of this new replacement tenant, potentially.

Mr. Vinay Tanna: I suppose you could also add to that, that the landlord should really probably wouldn't accept rent directly from that new tenant in any event. And so it'd have to still come through you actually said. So just be wary of that. They won't accept it directly from someone else.

One of the questions come up is to do with, Rent Deposit deeds, James, as a Rent Deposit Deed. So the landlord is asked here that, his tenant wants to use, the rent deposit fee. Ss that a good idea? And it seems again very neat. You know, he's got that money stashed away. why not? Why not dip into it? Mr. James Harrison: Well, as I said, The landlord can dip into it and you can withdraw the rent but there's usually a requirement in the rent deposit deed for the tenant to top up that amount, within a certain period of time of the date of withdrawal by the tenant. So the tenant isn't paying the landlord the rent in the normal way effectively, he's still being required, pay to the landlord the amount by which the landlord has withdrawn. So effectively, he will still have to pay the money into the rent deposit deed. So although not paying the rent, he's still having to make a payment to the landlord to ensure that the rent deposit deed it's topped up.

Mr. Vinay Tanna: If an arrangement is accepted, say by the landlord, well, That's a good idea. And what, in what form would you want to sort of try and record what the arrangement is? How would it be recorded? Mr. James Harrison: Well, it would probably need some formal side letter or agreement to document that, so that it's in writing and then attached to the Rent Deposit Deed. Mr. Vinay Tanna: Fine. And Daniel, do you want to add anything in terms of sort of messing around with the Rent Deposit deed or, and then non-payment after that, let's say if he wants to Sue after that, and then the tenant doesn't pay, to top up the rent deposit deed, what recourse does the landlord have?

Mr. Daniel Flynn: Well, I mean, apart from suing from paid rent and taking the money for the Rent deposit deed. if it's a term of tenancy that the, rent deposit deed is kept properly topped up, which probably will be in a modern commercial lease, then that it would be a breach, in the tenancy for the purposes of potentially bringing the tenancy to an end, potentially looking at getting the tenant out. And once you get them out,you will then in the course of those same proceedings, be able to ask the court for an order that they kind of pay up to date. So take the money that's in the rent deposit deed and get an order from the court that the tenant to pay anything that's in our standard.

Mr. Vinay Tanna: Right, so then the next question, it's a really good question, very pertinent. And that is that If the landlord is approached by the tenant, on the view that actually want to, have a more moratorium on the rent. And let's say you give a, three months grace, how does it be fair in terms of the landlord's rights? And then obviously if the landlord is then stuck with the situation where he died, either that three months is not recovered and they don't pay, or they don't stop paying rent. So, we have a situation where we're landlords are. listening and they are, aware of situation. and they, they do well. They are, trying to help tenants, they try to and help the tenant, but the tenant then is able to then, continue with that, paying the rent. What, what's the, what's the situation now I'm going to go to Daniel and this gets more litigious. So there, isn't a sort of an agreement in place that there's three month Waver. After that the tenant stops paying. What's the situation with the Landlord's rights? Cause clearly he's given some leeway,

Mr. Daniel Flynn: I mean, giving leeway in a temporary set of circumstances, as long as everything's done in a way, which is clear and in writing wouldn't affect this overarching obligations under the lease. So I think if you were to say, I've given three months leeway, but that's all I'm prepared to give. And then after that, the tenant still doesn't pay, then it's their obligations continue as normal. So effectively say like the, it doesn't change the position. They go stop paying rent again after this three months are up. I think so I've seen it on the chat that somebody asks about a month rent free. but that it's not, that's not going to help him that she's thinking about serving a notice in order to end the tenancy. And there's a similar point, the two things about a month rent free and about the ending of the tenancy or the obligations of the tenancy while it continues are pretty independent of each other. So if you know, there's been a month waived. Then that's fine. And that's an agreement that you've reached between you and your landlord, the obligation is to serve notice under the landlord and tenant act to end the tenancy, or to go through the formalities of the tenancy already changed that rent-free agreement that rent free month agreement to have a month rent free is kind of, is a separate, free-standing agreement, which just affects that one month. It doesn't affect the other obligations under the tenancy. Right. So in answer to the final question, sort of in the last sentence of that question on the chat, it cannot take the month for free and still serve notice. Yes.

Mr. Vinay Tanna: Okay. and just on waiver, Daniel, incase of the waiver, how should the landlord deal with waivers? Because you know, landlords were always told unequivocally by solicitors, you know, don't do anything that will create a waiver of your rights. So how is the landlord really going to protect himself, even though he's trying to be helpful? Mr. Daniel Flynn: I mean, I think the best thing to think about is the landlord. There's a number of different ways of dealing with this situation. It is a very challenging situation for all businesses and for all commercial tenants and landlords. But there are different approaches depending on the circumstances. So the first to think of is what's going to be the effect on the business. That's the tenant business, you know, are they going to be able to afford to make up the money when it's, due in the future, because perhaps I could say I'll defer rent rather than waiving it. if I'm going to say I'll have to just have a rent free period, then that's fine too. But I think the important thing is to think is to make sure that everything is done in writing and in a way, which is clear.

So when I say what I mean, it's there in what you're proposing. So I propose that instead of the rent being X thousand pounds due in June 2020, it will be Y thousand pounds or zero. but that will not affect the other obligations under the lease regarding rent in the future or, service charges now, for example, or any other costs now. I think, the two sort of overarching points are, entering into the dialogue between landlord and tenant and make sure that you don't do anything unless it's clearly documented in a letter and ask the solicitor, he would help in drafting a letter. And you know, this can be a major expensive, big money, commercial decision that you're making. Do you think about getting this listed to look over any waiver agreement that you Decide to enter into. so we should coming to the end of this one question, which is not on there, but it's, is really the final bit, which is really in terms of nonpayment. In the end, does the landlord go in with a sledgehammer and effectively just call it quits with the tenant. I mean, what's the advice in Pamela's Solicitor as to just clear cuts, can't pay rent at this moment at this moment in time. Mr. James Harrison: Well I think that, basically, I mean, if the landlord just wants to, have a permanent break the tenant. He probably needs to consider whether he can let the premises out to somebody else, as mentioned earlier, that may not be so easy currently. So some rent or some payment may be better than not at all

Mr. Vinay Tanna: Dan, Did you want to say anything now?

Mr. Daniel Flynn: No, After that

Mr. Vinay Tanna: Okay, good. So last question. Hi, my landlord has given me three months, rent free period writing. How can I ask for more?

Mr. Daniel Flynn: There's a dialogue with your Landlord. your landlord, the starting point is that your commercial lease contains an obligation to pay rent and COVID-19 doesn't change that. but on the other hand, I'm sure that landlords have good conscience and, we'll be able to try and work something out.

Mr. Vinay Tanna: Thank you so much, James and Daniel.

So next week it is an attorney webinar. That is Buying and Selling property during Lockdown. Are you serious? So we're going to try and really answer some of those questions  which people are asking, whether you can buy and sell now. So thank you everybody for, for coming on board, this beautiful, first, Wednesday afternoon, and we'll see you next week. Thank you. Thank you. Thanks very much.

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